Managing Innovationand Fostering Corporate

Entrepreneurship

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter Twelve

Learning Objectives

After reading this chapter, you should have a good understanding of:

LO1 The importance of implementing strategies and practices that foster innovation.

LO2 The challenges and pitfalls of managing corporate innovation processes.

LO3 How corporations use new venture teams, business incubators, and product champions to create an internal environment and culture that promote entrepreneurial development.

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Learning Objectives

LO4 How corporate entrepreneurship achieves both financial goals and strategic goals.

LO5 The benefits and potential drawbacks of real options analysis in making resource deployment decisions in corporate entrepreneurship contexts.

LO6 How an entrepreneurial orientation can enhance a firm’s efforts to develop promising corporate venture initiatives.

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Managing Innovation

• Innovation using new knowledge to transform

organizational processes or create commercially viable products and services

Latest technology, results of experiments, creative insights, competitive information

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Example: Getting to ‘Aha’

• There are “five disciplines” for creating what customers want Identify important customer needs Create solutions that fill those needs Build innovation teams Empower "innovation champions" who keep the

effort on track Align the entire enterprise around creating value for

customers

Source: “Getting to ‘Aha!’,” Business Week. September 4, 2006.

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Types of Innovation

• Product innovation Efforts to create product designs Applications of technology to develop new

products for end users More radical and common during early

stages of an industry’s life cycle Associated with differentiation strategies

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Types of Innovation

• Process innovations Improving efficiency of an organizational

process Manufacturing systems and operations More likely to occur in later stages of an

industry’s life cycle Associated with cost leader strategies

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QUESTION

Radical innovations A. Often result in quick profitsB. Often represent technological breakthroughsC. Usually apply to products and processes simultaneouslyD. Usually cannot be patented

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Types of Innovation

• Radical innovation Fundamental changes and breakthroughs Evoke major departures from existing

practices Can be highly disruptive Can transform or revolutionize a whole

industry

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Types of Innovation

• Incremental innovation Enhance existing practices Small improvements in products and

processes Evolutionary applications within existing

paradigms

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Continuum of Radical and Incremental Innovations

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Types of Innovation

• Sustaining innovations extend sales in an

existing market, usually by enabling new products or services to be sold at higher margins.

• Disruptive innovations overturn markets by

providing an altogether new approach to meeting customer needs.

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Challenges of Innovation

• Seeds versus Weeds

• Experience versus Initiative

• Internal versus External staffing

• Building capabilities versus Collaborating

• Incremental versus Preemptive launch

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Seeds versus Weeds

• Deciding the merits of innovative ideas Seeds – likely to bear fruit Weeds – should be cast aside

• Dilemma Some innovation projects require considerable

level of investment before merit can be determined

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Experience versus Initiative

• Deciding who will lead an innovation project Senior managers have experience and

credibility and tend to be more risk averse Midlevel employees may be the innovators

themselves and have more enthusiasm

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Internal versus External Staffing

• People drawn from inside the firm May have greater social capital Know the organization’s culture and routines May not be able to think outside the box

• People drawn from outside the firm Are costly to recruit, hire, train May have difficulty building relationships

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Building Capabilities versus Collaborating

• Firms can seek help Other departments Partner with other companies that bring

resources and experience

• Partnerships Create dependencies and inhibit internal

skills development Sharing benefits of innovation may create

conflict

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Incremental versus Preemptive Launch

• Incremental launch Less risky Requires few resources Can undermine the project’s credibility if too

tentative

• Large-scale launch Requires more resources Can effectively preempt a competitive

response

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Defining the Scope of Innovation

• Firms must define the “strategic envelope” (scope of the innovation efforts)

• Firms ensure that their innovation efforts are not wasted on projects that are outside the firm’s domain of interest.

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Defining the Scope of Innovation

• In defining the strategic envelope, a firm should answer several questions How much will the innovation cost? How likely is it to actually become

commercially viable? How much value will it add; that is, what will it

be worth if it works? What will be learned if it does not pan out?

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Managing the Pace of Innovation

• Incremental innovation May be six months to

two years May use a milestone

approach driven by goals and deadlines

• Radical innovation Typically long term –

10 years or more Often involves open-

ended experimentation and time-consuming mistakes

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Staffing to Capture Value from Innovation

• Create innovation teams with experienced players

• Require that employees seeking to advance their career serve in the new venture group

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Staffing to Capture Value from Innovation (cont.)

• Once people have experience with the new venture group, transfer them to mainstream management positions

• Separate the performance of individuals from the performance of the innovation.

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Collaborating with Innovation Partners

• To choose partners, firms need to ask what competencies they are looking for and what the innovation partner will contribute.

• Knowledge of markets

• Technology expertise • Contacts with key

players in an industry

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Corporate Entrepreneurship

• Corporate entrepreneurship the creation of new value for a corporation,

through investments that create either new sources of competitive advantage or renewal of the value proposition.

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Factors affecting Entrepreneurial Ventures

• The use of teams in strategic decision making• Whether the company is product or service

oriented• Whether its innovation efforts are aimed at

product or process improvements• The extent to which it is high-tech or low-tech

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Rules for Fostering

Innovation

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Focused Approaches to Corporate Entrepreneurship

• New venture group a group of individuals, or a division within a

corporation, that identifies, evaluates, and cultivates venture opportunities.

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New Venture Groups

• Involvement includes Innovation and experimentation Coordinating with other corporate divisions Identifying potential venture partners Gathering resources Launching the venture

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Focused Approaches to Corporate Entrepreneurship

• Business incubator supports and nurtures

fledgling entrepreneurial ventures until they can thrive on their own as stand-alone businesses.

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Business Incubators

• Incubators provide some or all of the following functions Funding Physical space Business services Monitoring Networking

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Dispersed Approaches to Corporate Entrepreneurship

• Dedication to principles and practices of entrepreneurship is spread throughout the firm

• Ability to change is a core capability

• Stakeholders can bring new ideas or venture opportunities to anyone in the organization

• Entrepreneurial culture, Product champions

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Entrepreneurial Culture

• Culture of entrepreneurship Search for venture opportunities permeates

every part of the organization Strategic leaders and the culture generate a

strong impetus to innovate, take risks and seek out new venture opportunities

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Product Champions

• Product (or project) champions Bring entrepreneurial ideas forward Identify what kind of market exists for the

product or service Find resources to support the venture Promote the venture concept to upper

management

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Measuring the Success of Corporate Entrepreneurship Activities

Comparing strategic and financial CE goals1. Are the products or services offered by the

venture accepted in the marketplace?

2. Are the contributions of the venture to the corporation’s internal competencies and experience valuable?

3. Is the venture able to sustain its basis of competitive advantage?

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Measuring the Success of Corporate Entrepreneurship Activities

• Exit champions individual working within a corporation who is

willing to question the viability of a venture project by demanding hard evidence of venture success and challenging the belief system that carries a venture forward.

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Real Options Analysis

• Real options analysis for each investment step the investor has the

option of (a) investing additional funds to grow or accelerate, (b) delaying, (c) shrinking the scale of, or (d) abandoning the activity.

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Potential Pitfalls of Real Options Analysis

• Agency Theory and the Back-Solver Dilemma

• Managerial Conceit: Overconfidence and the Illusion of Control

• Managerial Conceit: Irrational Escalation of Commitment

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QUESTION

On average, approximately what percentage of corporate ventures reaches profitability after six years? A. 80 percentB. 65 percentC. 50 percentD. 35 percent

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Dimensions of EntrepreneurialOrientation

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